Health care planning a key element

Employers, advisers must help clients figure out how to pay for retirement medical expenses
July 29, 2012

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Few issues in American life generate higher anxiety than rising health care costs. This year's presidential election, for example, is sure to have health care as a central, contentious issue. And anyone who looks at the data knows that Medicare and Medicaid are key drivers of another huge national concern: soaring federal deficits.

American employers, for their part, not only worry about how health costs will affect their businesses but also about whether some of their workers may be clinging to their jobs for fear of losing health coverage. Finally, nearly everyone who is anywhere near retirement age worries about whether they have saved enough to cover their health care costs once they retire. Regrettably, these worries are well-founded. For years, expert analysts at the Employee Benefits Research Institute and other retirement research centers have been sounding the alarm about retiree health costs. EBRI's estimates of lifetime medical expenses for a healthy couple now 65 run into hundreds of thousands of dollars. Some workplace savings providers have responded to these concerns by including generalized information on retiree health costs in their offerings. The information typically takes the form of an unnervingly large number a quarter million dollars or more that many workplace savers find paralyzing rather than motivating. Many people are overwhelmed to the point of inactivity, which may be one reason why they have done little to address their own future health care expenses and, more broadly, have been reluctant to include this important factor in their planning around retirement income needs. This year's Putnam Investments Lifetime Income Score research (done in collaboration with Brightwork Partners LLC), for example, found that only 12% of working Americans have taken any account of health costs in their retirement planning. Nearly nine out of 10 are flying blind when it comes to understanding or dealing with what could be, for many, one of their largest costs in retirement. Four out of five baby boomers in the survey cited uncovered health expenses and the risk of becoming ill as their two top financial concerns in retirement. More than half admitted to knowing virtually nothing about the costs of participating in the Medicare program. But even while health costs poll as one of the gravest concerns among Americans in or close to retirement, the retirement services industry has made minimal progress toward addressing these concerns.

To be sure, there is not and actually can't be any one-size-fits-all solution to retiree health costs. Health varies among individuals. A person may or may not use tobacco, for example, or have diabetes, cardiovascular disease, cancer or other illnesses. Excellent health, ironically, actually can raise an individual's lifetime health spending needs because of the likelihood that healthy 65-yearolds will live much longer. By contrast, the initially higher costs to a retiree who is dealing with health issues are likely (statistically) to be offset by earlier mortality. While it is impossible to project a specific individual's health care costs across what may be decades of retirement, the impossibility of precision is no excuse for inertia. Doing nothing to understand and address retiree health costs is not an option. The challenge and the opportunity is to offer individuals a directional sense of their future health expenses and a chance to readdress their potential monthly income needs in retirement. More specifically, the need is for a user-friendly basic heath cost assessment built right into individuals' workplace savings experience. Critical elements include well-established actuarial data associated with dominant health variables, the state in which a retiree lives, publicly available estimates on Medicare costs and how they break down, as well as real assurance to participants that any data they enter will be strictly confidential. Can it be done? Absolutely. Integrating health costs into the participant experience is the next frontier for workplace saving. Edmund F. Murphy III is the head of the defined-contribution business at Putnam Investments. W. Van Harlow is Putnam's director of retirement solutions and the head of the Putnam Institute.

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